Customer Acquisition Cost, or CAC, is the cost of acquiring a new customer in your business. The metric is used in a variety of industries, but is perhaps most common in SaaS and other subscription businesses. It is essential in many resource allocation decisions.

Why calculate CAC?

Having a deep understanding of the costs associated with acquiring a new customer will have massive implications on operational decisions in your business.

CAC and its sister metric, Customer Lifetime Value, or CLV, help drive strategic business decisions about what to sell, who to sell it to, how to deploy capital to acquire customers, and more. Customer acquisition cost is a core business metric that, without a solid understanding of it, can lead to costly mistakes later.

CAC benchmarks vary by industry. Even still, comparing your own CAC to a set of benchmarks may not be an apples-to-apples comparison. For this reason, we recommend taking the below CAC benchmark goals with a grain of salt when comparing them against your own current acquisition costs, or setting future company goals.

Additionally, CAC costs vary widely based on the size of your SaaS business. That said, the following numbers were reported in August 2023 by First Page Sage as average CACs for SMB, middle market, and enterprise SaaS companies in the following industries:

• eCommerce: $274 – $1,406 – $2,190
• Education: $806 – $2,814 – $6,659
• Hospitality: $907 – $3,724 – $9,448
• Legaltech: $299 – $2,630 – $6,441
• Medtech: $921 – $4,326 – $11,021
• Project Management: $891 – $2,925 – $7,430
• Security: $805 – $5,287 – $10,221
• Telecommunications: $694 – $5,266 – $10,980

Of course you’ll want to capture the lowest possible CAC while bringing in high-quality paying customers. However, you may find that it’s worthwhile to test more expensive marketing platforms or campaigns to see if they result in longer-term customers, improve your churn rate and reduce customer churn overall.

Clearly, CAC and the CAC ratio are important metrics for showing how much new customers cost to bring in. Equally useful, though, is to consider your CAC in comparison to customer lifetime value (LTV).

LTV refers to the amount of money any given customer is estimated to spend with your business. So, if your CAC is $250 and your LTV is $1,500, you know your profit margins are doing well. However, if your CAC is $250 but your customers only average about $100 in purchases, then your marketing and customer retention strategies may need some work.

LTV calculations typically use 1, 3, or 5-year calculations and use variables such as:

• Average purchase value
• Average purchase frequency
• Customer value (Average Purchase Value x Average Purchase Frequency)
• Average customer lifespan

To calculate LTV, multiply customer value by the average customer lifespan. That’s the revenue you can expect an average customer to spend at your company over their lifetime with you.

Here’s where calculating the cost of customer acquisition gets tricky. As with all SaaS metrics, there’s no governing body that dictates how to calculate it. Unlike GAAP financials, no standards board provides guidance on exactly what gets included in the calculation of CAC and what doesn’t.

However, there are some best practices to observe, and there are some common mistakes we’ve seen people make over the years.

CAC mistake #1: Including costs associated with existing customers

The biggest thing to remember is that CAC should only account for the costs associated with acquiring new customers.

The costs associated with maintaining existing customers or growing their usage of your product should not be included.

At Maxio, for example, we have a resource on our marketing team who is solely dedicated to marketing strategies for current customers. We’ll call her Katie because her name is Katie.

If most of Katie’s time is being spent on the customer side, it doesn’t make sense to include Katie’s salary and other employment costs in the overall Sales and Marketing spend that gets factored into CAC.

Because the cost of having Katie on the team is not associated with acquiring new customers, but rather the cost of maintaining and growing current customers, it would not be accurate to include her employment costs in the calculation.

CAC mistake # 2: Including only sales and marketing expenses 

Another common mistake people make when calculating CAC is including only Sales and Marketing related expenses in their calculation.

In fact, most websites cite the formula for CAC as:

CAC  = Sales and Marketing Expenses /  Number of New Customers

But this is not entirely correct.

The formula should actually read:

CAC = Costs Associated with Acquiring a New Customer /  Number of New Customers

The first formula for CAC paints an incomplete picture of the true costs associated with acquiring a new customer in a period of time with your marketing campaigns.

By including only sales and marketing expenses, you’re potentially leaving out other kinds of costs associated with acquiring the new customer.

Take, for example, a company that offers free trials or proof of concept of their software. That trial or PoC isn’t free. There are possibly server costs associated with hosting that customer’s trial and implementation/support costs associated with facilitating the trial.

To leave those costs out of your CAC calculation would mean painting an inaccurate picture of the actual cost of acquiring a new customer.

A clear picture of total marketing, total sales, and the amount of money spent can be tricky to calculate. Yet, understanding this as accurately as possible can help you get new potential customers.

Small teams wearing multiple hats 

Another consideration to take into account when calculating CAC is the nature of work at smaller companies and the tendency for employees to “wear multiple hats.”

For example, suppose you’re at a small SaaS company where your sales team is managing existing customers as well as closing new ones. In that case, you do not want to include 100% of that person’s associated costs in your CAC calculation.

Suppose a salesperson earns a $100,000 base salary, but their time is split 70/30 between chasing new customers and nurturing existing ones. In that case, it makes sense to allocate only $70K of the base salary rather than the full $100K to your cost of acquisition (for now, we are omitting the related variable comp and marketing costs for this rep’s deals).

A more explicit example of the above:

The rep above closed a deal for a new customer in January and earned a $2,000 commission.

Our analysis of marketing costs to get this customer was $5,000. So the complete CAC for that 1 customer in January would include the following:

100,000 *0.7 = 70,000/12 months = 5833 (portion of time spent on new customer acquisition in January)  + 2000 (rep commission for this customer) + 5000 = 12833 total.

This is a cut-down example for clarity. Day-to-day, rather than figuring it out per customer, you would most likely lump all relevant costs together for January and divide by the number of new customers in January.

Cost amortization 

While some acquisition costs are more straightforward, others are harder to attribute to a specific time period.

For example, say your sales team attends a trade show in January, but you expect to acquire customers from the leads generated there over the course of the year.

If you attributed the cost of the trade show in its entirety to January, your acquisition cost would seem disproportionately high compared to the number of new customers you acquired in January.

It would then follow that it makes more sense to amortize the conference’s cost over the course of the year so that it more accurately reflects the return on investment of attending the trade show.

For startups, the cost of amortization can be confusing and challenging, especially in the SaaS business model.

Unlike other SaaS metrics such as ARR or MRR, CAC is a bit of an accounting project on its own, requiring analysis and management judgment. You can’t simply plug a few inputs into a calculator and have it spit out your customer acquisition cost.

Since there’s no governing body for SaaS metrics, there’s a lot of room for interpretation when calculating the metric.

This is why instituting a CAC policy is a good idea. Like revenue recognition, calculating CAC has less to do with following a specific script and more to do with being clear and consistent in the way you define and calculate it.

A revenue recognition policy is a single document that summarizes your processes and methodologies used to recognize revenue. Your rev rec policy is where you establish the rules that govern the consistent application of the ASC-606 or IFRS-15 framework at your company.

A CAC policy would function in the same way. Your CAC policy is a single document that summarizes what goes into your customer acquisition cost calculation and why. It also ensures the metric is being calculated the same way across the business.

Additionally, it serves as documentation to point back to if and when your investor asks you to elaborate on how CAC is calculated in your businesses.

It’s important to note that your CAC policy, like your rev rec policy, will evolve as the business evolves. What makes sense to include in the calculation today may not make sense in a year or two, so it’s a good idea to revisit the policy periodically.

As we said before, the most important things to keep in mind when calculating CAC are:

1. The costs of acquiring new customers
2. Additional costs of acquiring a new customer that you deem relevant, not just your sales and marketing spend

However, there’s still a lot of ambiguity about what should be included and what shouldn’t.

The simplest guidance here is to only include what makes sense for your particular business.

For example, some people include things like rent in their customer acquisition cost. But this may not make sense for your business.

If only 1% of the team in the office is devoted to new customer acquisition, including more than 1% of the rent would overstate the rent portion of your CAC.

Worse still, what if your staffing level changes? You’ll need to make sure you update your CAC policy and calculations.

Given the overhead of maintaining the rent portion of the calculation and policy and the fact that you won’t be able to do much about the rent cost in any case (assuming you signed a lease), you are probably better off excluding it in this example.

An easy litmus test for this is to ask your investor. If your investor asks about rent, include it in your calculation. If they don’t, leave it out.

A quick note on investors

You have a lot of leeway to calculate your customer acquisition cost as you see fit in your business, but that doesn’t mean you should get too crazy.

It’s common to only include inputs that make you look good, but keep in mind that investors are very skeptical about CAC numbers that seem too good to be true.

Plus, if your CAC number isn’t an accurate representation of what’s going on in your business, it will be ineffective in helping you make critical operational decisions.

By better understanding your marketing spend, including all marketing costs, and your conversion rate, you learn a great deal about your business. You can make changes faster and with better insight so you’re not just getting new customers, but your total costs align with your profit goals. In other words, if you’re accurate and thorough, that’s going to give you more usable information to influence future business decisions.

Executive leaders need to better understand what’s causing your customer acquisition costs to rise. To do that, you need to consider all of the various components that go into CAC. Some of the most common types of CAC include:

• Initial CAC: The cost of obtaining a first-time customer
• Renewal CAC: The cost associated with renewing a customer to have them continue using your SaaS business
• Reactivation CAC: The cost you put into acquiring a customer again, perhaps one that was churned at some point in recent history
• Market CAC: This is a more specific CAC that looks at your acquisition strategy in a very specific market or area. It may focus on a specific vertical sector as well
• Product CAC: The CAC for a specific product rather than a company-wide view
• Customer CAC: This allows you to par down your comparison to a specific type of customer, such as a demographic-based version or an industry-specific one

As noted by all of these steps thus far, your goal is to make the best use of your money to build your customer base, and CAC payback improves when you’re earning consistently from your customers over time. Here are some ideas to help you reduce CAC costs, keep customers longer, and keep them spending more all the while.

Restructure your marketing strategy

If your CAC is just too high, your first thought will probably be along the lines of reworking your campaigns. While you may want to scrap your current campaigns altogether, sometimes all it takes is simply looking for ways to do the same work for less.

• Review your most ineffective campaigns and start by reducing ad spend on those ones only
• Optimize existing campaigns to make sure they’re properly speaking to your target audience
• Try organic social media efforts instead of investing in expensive local campaigns
• Focus marketing spend on strategies that have the best reach in each marketing channel
• Don’t forget to update core product and feature pages, as well as campaign landing pages, for search engine optimization (SEO)
• Structure sales rep or related employee salaries to be incentive-based

Boost customer retention

Increasing your customer retention rates keeps customers with you for longer, can help increase their average order value, and can promote more word-of-mouth referrals and new customer acquisitions.

There are several ways to improve customer retention, starting with providing an outstanding product or service that your marketing efforts and brand messaging promises. Beyond that, we’d recommend:

• Provide a strong onboarding process that ensures customers know how to use your product properly
• Surprise and delight customers with unexpected perks and add-ons that keep them coming back for more
• Engage with users on social platforms and make them feel a connection with your brand
• Use a loyalty program to encourage customers to continue engaging
• Use a customer relationship management (CRM) program to anticipate possible detractors, then engage and prevent them from churning

Knowing your SaaS renewal rate will be useful when aiming to optimize your retention, so be sure to start there.

Increase the average customer lifetime value

It’s always a good idea to enhance CLV, as that makes your acquisition strategy a bit easier to manage. A few ways to boost the lifetime value of your customers include:

• Providing personalized or customized products or services
• Including upsell and cross-sell opportunities that pair well or increase the effectiveness of the core product or service being sold
• Offering separate tiers in your loyalty program, and encouraging users to upgrade to the next one
• Offering limited-time promotions that instill a sense of urgency to buy something before it’s gone